Demystifying Systematic Transfer Plans

Today, many investors are aware of the benefits of investing in mutual funds through the SIP route. However,
'Systematic Transfer Plans' (STPs) are still a mystery to many. Here's an attempt to demystify it:

In the case of mutual funds, a STP refers to transfer of money from one scheme to another at pre-determined intervals.

Usually, STPs are undertaken from liquid schemes into equity schemes.

For instance, Rs. 48000/- is invested into a liquid scheme and Rs. 4000/- is transferred into an equity scheme every month for 12 months.

The scheme to which the money is transferred is known as the Transferee Scheme and the other is known as the Transferor Scheme. For instance, if money is transferred from a Liquid Scheme to an Equity scheme, the latter is the transferee scheme.

Usually there is no upper limit. However, the lower limit will depend on the provisions contained in one / both the schemes. For instance, if the minimum investment in an equity scheme is Rs. 1000/-, we would not be permitted to transfer a sum of Rs. 500/- from the Liquid scheme into the equity scheme via STP. Also, the minimum number of transfers may be specified (Say, Minimum of 6 monthly instalments).

STPs (like SIPs) enable us to divide our investment over long periods and reduce the scope for losses. Losses could still occur if the stockmarket only moves up for several months / years and then reverses suddenly and sharply.

STPs (like SIPs) help us buy more units when markets are low and less when markets are high. Hence they enable us to profit from market fluctuations without us having to second-guess market movements. Consequently, it is not prudent to wait for a 'right time' to begin.

No. The period too depends on your financial goals. Generally, the longer you undertake STPs into equity schemes the better, as equity schemes often deliver good returns, but only if held for many years.

1. It encourages discipline :
Signing up for a SIP is good,..but since the money continues to remain in your bank account you may be tempted to use it for other purposes.

However, if you sign up for a STP, the chance of being indisciplined reduces considerably as the money moves out of your bank account and into the liquid scheme at one stroke. Not seeing the money in your bank account could automatically reduce the temptation to spend frivolously.

2. It may be quicker to start a STP
STPs can usually commence within seven days of applying, while SIPs often take 15 days or more. It is also less
cumbersome to commence an STP as the unitholder need not give any instruction to his/her Bank.

3. Chance of earning higher returns:
A STP requires you to first invest in a scheme (often, a liquid fund) and investors in liquid funds usually earn
slightly higher returns than those who simply park their money in savings bank accounts.

4. Reduces the scope for fear...
Many times, investors refrain from investing money during market corrections, fearing further falls. The chance of
such discontinuance reduces if money is already parked in a liquid fund and is moved periodically into an equity
fund.

5. ...and greed
Soaring stockmarkets may tempt us to Invest large sums of money in one instalment, thereby increasing the
chance of losses if markets correct suddenly. Investing in a liquid fund and then undertaking STP reduces the
chances of suffering from bursts of 'emotional investing'.